ROI Redefined: A New Definition Aligned With Business Needs
Posted: 11/30/2011 12:00:00 AM EST | 2
If you are in the human resources function, at some point you will be challenged about the value of your activities. Business operates according to the laws of limited resources.
Not everything the organization does is worth doing. Every activity should be open to assessment and questioning. Adjustments should be made, and new directions should be taken, if there is a better, more efficient, more productive or meaningful approach available. But how does the organization assess and measure value? Is there a double standard in place for HR activities compared to, for example, what is done through marketing or finance?
A Return On Investment (ROI) assessment of a Human Resources process should add quality information to the decision making process by providing light on the impact of an initiative that has been designed to meet the organization’s strategic business plan. Only then can we be confident that an initiative will be worthy of the precious resources it will draw.
Unfortunately, the process and assumptions behind HR-ROI are vague. The concept is not easy to research because it is complex in nature, involving too many variables that impact results. Yet, the notion of establishing ROI in advance is tantalizing, and a frequently discussed topic.
ROI is one of many performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments.
To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or ratio.
ROI analysis is only one of several approaches used to build a financial business case. The measure allows decision-makers to evaluate the investment by comparing the magnitude and timing of expected gains to the investment costs.
ROI is also a tool for improving a business case. In other words, decision-makers will look for ways to improve ROI by reducing costs, increasing gains, or accelerating process time. ROI is part of the vernacular of the leadership of the organization. Human resources has learned that it must speak this language if it is to gain and retain a seat at the strategic table.
Challenging the Basic Assumptions
There is an implicit assumption when ROI is employed for measuring the value of HR. Spending on human resources development should not be considered the cost of doing business but rather an investment in human capital. The investment in any and all HR activities should result in organizational performance improvement. The HR activities themselves are being offered to ensure employees will be able and willing to execute the business plan that leads to a customer values proposition that increases economic viability. In this way, the current and future needs of the organization will be met.
How do you accurately measure programs that focus on intangible, non-monetary benefits, while directly and clearly linking the intangibles to the ultimate results? Well-designed HR programs can result in improvements in public image, increased job satisfaction, increased organizational commitment, reduced stress, and teamwork, all of which will make the organization more capable of meeting its goals. Yet, the direct and explicable improvements that are dividends from the intangible activities can be notoriously difficult to measure or tie to specific HR initiatives.
Alternative Definitions of HR-ROI
In today’s fast paced world, anyone that wants to invest their time and money wants to know what will be their return? It’s the WIFM – “What’s in it for me?” – question that gets attention.
Human Resources can explore ROI over a number of different dimensions to more fully assess and articulate the value of specific programs. Those dimensions include:
- Return on Individual: To what extent has the information provided in the program positively changed the behaviors of individuals who attend?
- Return on Ideas: Has the program stimulated the brain cells of the participants to create ideas that will only help promote growth personally and organizationally?
- Return on Improvements: From the ideas shared and the learning sessions, the improvements suggested will positively impact the organizations performance.
- Return on Industry: If we get those who attend to provide ideas, which in turn provide improvements, the industry will see and experience the benefits and will want more work from you.
- Return on Instructor: The instructor can make or break the outcome of any training program. Has the instructor delivered the message effectively so that it will impact those attending and impacted the participants and made a difference?
Return on Intangible: Has the behavior (the intangible) that is being developed in the session caused an increase in productivity?
Better Questions Aligned with the Purpose of HR
Are we asking the right questions?
We need to consider:
- How does HR organize itself?
- Who does the HR work? (HR professionals, consultants, contractors, line-managers)
- Where is the accountability for the HR work?
- How do the HR generalists, the HR specialists and the OD practitioners interact among themselves and with their clients?
- How does the HR activity help the organization execute the strategic business plan?
By asking such questions you can begin to assess the gap between the current reality and the desired end-state. This is important because HR needs to understand the impact people have on the current situation as well as what they must change or do differently to get to the desired end state. And all of this must be linked to the company’s strategic business plan.
A New Definition Aligned With Business Needs
CFOs are not always clear why they are asking HR for ROI measures, but it is usually perceived to be the case that HR is being asked to prove its viability. Yet, the majority of CEOs and CFOs do not seem to be asking for HR-ROI information. The real question should be: Is HR adding capabilities to the organization that improves its performance?
ROI is only an educated guess at a proposed project or activity. There is no guarantee that it will come out as anticipated. What’s more, as Albert Einstein has noted, “Not everything that can be counted counts, and not everything that counts can be counted.” Instead of calculating ROI the traditional way, HR must learn how to determine and articulate how its work adds value to the business in economic terms. It must honestly assess whether the ROI-HR’s processes or activities impact the business, or whether they are merely in place for the sake of tradition, or because they have been benchmarked from a competitor, or because HR might win an award for establishing the program.
None of that matters compared to the business value.
In contrast, I suggest the following dimensions for assessing the worth of an HR process, program or activity. HR should ask how its work impacts the business in terms of one or a multiple of the following:
- Increased productivity
- Improved customer satisfaction and loyalty
- Execution of the business strategy
If that scorecard is established, then leadership will be speaking in the language of Human Resources.
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I enjoyed your article. Here's a thought. How about adding "Return on Intent"? Since our beliefs and values impact our behaviors, we should evaluate HR investments on the basis of how it impacts intentions.
I'm sorry the previous poster's comment missed the mark. HR-ROI is not a challenge with a silver bullet solution. We will get where we want and need to be after we redefine the language. I put this topic in the same category as leadership development. How do you quantify the impact of leadership? It's hard, if not impossible. But, people at all levels of an organization understand the importance and relevance of effective leadership, even if they can't measure it. More importantly, people recognize good leadership when they see it. When you believe in something, you'll support it, metrics or not. (www.ClancyCross.com)
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